1



# AA**- 10 Subpart H Production Safety Systems** 

**Economic Analysis**
June 27, 20132 

# Outline A. EXECUTIVE ORDER 12866 1. Need for regulation 2. Alternatives 3. Economic anal ys is 4. Section
- by
- section analy sis of costs a. Reporting after a failure of SPPE equipment b. Notifying BSEE of specified production safety issues c. Certification for designs of mechanical and electrical s ys tems d. Certification letter for mechanical and electrical systems installed in accordance with approved designs; e. Certification of as
- built diagrams of schematic piping and instrumentation diagrams and the safety anal ys is flow diagram f
. A s - built piping and instrumentation diagrams to be maintained at a secure onshore location g . Inspection, testing, and certification of foam firefighting s ys tems h
. Inspection of fired and exhaust heated components i
. S ubmission of a contact list for OCS platforms j
. Industry

familiarization with the new rule 5. Summary

of the cost anal ys is 6. Benefits anal ys is a. Data b. Methods c. Anal ys is results B. REGULATORY FLEXIBILITY ANALYSIS 1. Description of the Reasons That Action b y the Agency Is Bein g Considered 2. Description and Estimated Number of Small Entities Regulated 3. Description and Estimate of Compliance Requirements3

a. Reporting after a failure of SPPE equipment b
. N otifying BSEE about production technical issues c . C ertification, submission, and maintenance of designs and diagrams d
. Inspection, testing, and certification of foam firefighting s ys tems e . Inspection of fired and exhaust heated components f
. S ubmission of contact list for OCS platforms g . Industry

f amiliarization with the new regulation s 4. Total cost burden for small entities 5. Description of Significant Alternatives to the Proposed Rule4

**A. EXECUTIVE ORDER 12866**  Under Executive Order 12866 (E.O.), BSEE must determine whether a regulato ry action is significant and , therefore , subject to the requirements of the E.O. and review by the Office of Management and Budget (OMB). Section 3(f) of the E.O. defines a “ significant regulatory action ” as any regulatory action that is likely to result in a rule that: (1) has an annual effect on the economy of $100 million or more, or adversely affects in a material way the economy, a sector of the economy, productivity , competition, jobs, the environment, public health o r safety , or State, local , or tribal governments or communities (also referred to as “ economically significant ” ); (2) creates serious inconsistency or otherwise interferes with an action taken or planned b y another agency; (3) materially alters the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raises novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the E.O. The BSEE has determined that this p rop osed r ule , which would amend and update the 30 CFR Subpart H , Oil and Gas Production Safety S ys tems , does not constitute an economically significant regulatory

action under Section 3(f)(1) of the E.O
. The rule is not expected to impose an annual cost of $100 million or more and it will not advers el y affect the economy, a sector of the economy , productivity , competition, jobs, the environment, or public health or safety in a material way
. In fact, this p roposed r ule is intended primarily to codify standard industry practice and clarify

existing BSEE regulations and guidance
. The requirements for oil and natural gas production facilities under the p roposed r ule align with those under the 1988 Final Rule and other existing documents that regulate and guide the industry (e.g., Deepwater Operations Plans (DWOPs), Notices to Lessees (NTL s), and American Petroleum Institute (API)5

industry standards). Thus, the Proposed Rule does not qualify as an economically significant regulatory

action per Section 3(f)(1) of the E.O. 1. Need for regulation The BSEE identified a need to rewrite and revise the regulation regarding oil and natural gas production on the Outer Continental Shelf (OCS). The regulation address es issues such as production safety s ys tems, subsurface safety devices, and safety

device testing. These s ys tems play a critical role in protecting workers and the environment. The protection of human life and the env ironment is a major objective of this p roposed r ule. The BSEE has not revised the production regulation s since its first publication on April 1, 1988 (53 FR 10690)
. Since that time, much of the oil and gas production on the OCS has moved into deeper waters , which has introduced new issues for industry and BSEE
. For example, industry has shown interest in employing new technologies, including foam firefighting s ys tems; subsea pumping, water flooding, and gas lift; and new allo ys and equipment for high temperature and high pressure wells. However, the regulation ha s not kept pace with technological advances in the industry
. Many of the new provisions in the p roposed r ule serve to incorporate and codify current industry

practice. In addition, the wording and structure of the 1988 Final Rule create s confusion about the requirements. The BSEE has rewritten and reorganized the rule to clarify the existing requirements and highlight important information for regulated entities. The p roposed r ule would greatl y improve readability of the production regulation s .6

2. Alternatives We have considered two alternatives: (1) make the policy changes contained within this p roposed r

ule; and (2) take no regulatory action and continue to rel y on the 1988 f inal r ule in combination with the DWOPS, COAs, and NTLs issued since 1988
. These guidance documents, however, do not provide for predictability in BSEE requirements. They can also be lengthy and complex. For example, one of the NTLs that BSEE proposes to incorporate in this rule (NTL No. 2009
- G36, “Using Alternate Compliance in Safety Sy stems for Subsea Production Operations”) consists of 22 pages of detailed text. The p roposed r ule captures the basic guidance provided b y this NTLregarding underwater safety valves but does not include the same level of detail. The BSEE has elected to move forward with alternative 1 , the p roposed r ule, which captures high
- level requirements included in existing regulatory documents without excessive detail
. This approach clarifies BSEE’s basic expectations, providing industry with a balance of predictability and flexibility to address concerns related to offshore oil and natural gas production. The BSEE is requesting comment on other possible alternatives to consider, including alternatives on the specific provisions contained in this NPRM, with the goal of ensuring a discussion at the f

inal r ule stage. 3. Economic anal ys is The economic anal ys is presented below covers the offshore oil and natural gas production industry
. The BSEE derive d its estimates by comparing the costs and benefits of the new provisions in the NPRM to the baseline. Impacts that already exist ed as a result of the 1988 f inal
r ule , BSEE regulations , and APIstandards with which industry already complies were not considered as costs and benefits of this p roposed rule because they are part of the baseline
.7

The following section outlines how we quantified and monetized the costs of the p roposed
r ule for all provisions requiring new activities for industry or BSEE. The cost analy sis also considers the time required for industry staff to read and familiarize themselves with the new regulation. F ootnotes present the assumptions and data inputs used to calculate each cost estimate. The anal ys is covers 10 years (2012 through 2021) to ensure it captures all major costs that could result from this p roposed r ule. In a separate section below, we present the data, methodology , and results for the benefits anal ys is. We quantified and monetized the maximum potential benefits of the p roposed r ule two way s, reduction in oil spills and injuries as a whole, and then the provision of increasing the allowable leakage rate of certain safety valves
. For oil spills and injuries, the magnitude of these benefits, however, is uncertain and highl y dependent on the actual reduction in the probability of oil spills and injuries th e proposed rule would achieve. Due to this uncertainty , BSEE was not able to perform a standard cost
- benefit anal ys is estimating the net benefits of the proposed rule. As is common in situations where regulatory benefits are highly

uncertain, we conducted a break
- even anal ys is, which estimates the minimum risk reduction the proposed rule would need to achieve for the rule to be cost
- beneficial. This allowed BSEE to determine the cost
effectiveness of the p roposed r ule depending on the percentage of potential oil spills or injuries prevented and benefits of increasing the allowable leakage rate of certain safety valves
. As with the costs anal ys is, we estimated the benefits over a 10
- year time horizon (2012 through 2021). When summarizing the benefits and costs of specific provisions of this p roposed r ule, we present the typical annual effect, as well as the 10
- ye ar discounted totals to estimate the present value of the benefits and costs. We used discount rates of 3 and 7 percent, per OMB Circular A
4, “Regulatory

Anal ys is. ”8

We did not identify

any transfer pay

ments associated with the p roposed r ule. Transfer pay ments, as defined by

OMB Circular A
- 4, are pay ments from one group to another that do not affect total resources available to society
. Transfer pay ments are associated with a distributional effect but do not result in additional costs or benefits to society
. The BSEE welcomes comments on this analysis, including potential sources of data or information on the benefits and costs of this p roposed r ule. 4. Section
- by
- section analysis of costs The BSEE’s cost anal ys is evaluate d the expected impacts of the p roposed rule, as compared to the baseline (i.e., current practice in accordance with the 1988 f inal r ule, existing guidance documents, and industry

standards). If a provision is not expected to result in a change from the baseline, it was not reflected in the anal ys is. Specificall y, the anal ys is did not address impacts of provisions that were also included in the 1988 f

inal r ule and those a ssociated with activities required by guidance documents (e.g., DWOPs, NTL s ). For example, Section 250.800(c) of the Proposed Rule no longer allow s operators to install single bore risers from a floating production sy stem. Although this would be a new provision in the rule, it would not result in a new cost compared to the baseline because installation of multi
- bore ris ers is now standard industry policy (under DWOP s ). The BSEE has not approved single bore risers in several ye ars and none have been in stalled in the past five years. Finally , the anal ys is exclude d impacts resulting from codification of industry

standards (i.e., APIstandards ) with which industry already complies
. The anal ys is identifie d the provisions determined to result in a change from baseline: (a) reporting after a failure of SPPE equipment; (b) notifying BSEE of specified production safety9

issues ; (c) certification for designs of mechanical and electrical systems; (d) certification letter for mechanical and electrical systems installed in accordance with approved designs; (e) certification of as - built diagrams of schematic piping and instrumentation diagrams and the safety analysis flow diagram; (f) as
- built piping and instrumentation diagrams to be maintained at a secure onshore location; (g) inspection, testing, and certification of foam firefighting sy stems; (h) inspection of fired and exhaust heated components; (i) submission of a contact list for OCS platforms; and (

j ) industry

familiarization with the new rule
. These provisions and their associated costs to industry and government are discussed below.

a. Reporting after a failure of SPPE equipment Section 250.803(c) require s operators to report failure of any SPPE equipment to BSEE
. Specificall y, i f an equipment manufacturer notifies an operator that it has changed the design of the equipment that failed, or if the operator has changed operating or repair procedures as a result of a failure, the operator must submit the design change or modified procedures in writing to BSEE within 30 day s of the change
. Industry already generally sh ares failure information with manufacturers per API standards. This Proposed Rule specifies that industry must also share the more critical equipment failure information with BSEE so that BSEE is able to track these occurrences and improve quality control. The requirement to report design changes or modified procedures to BSEE would result in increased annual labor costs for industry and BSEE
. 1 To calculate the industry labor cost associated with this new provision, we multiplied the time required to report the change or

1 This requirement to report failure of SPPE equipment to BSEE, as other several reporting requirements in this Proposed Rule, is expected to be conducted electronically. Thus, this provision involves no mater ials cost.10

modification by

the average hourl y compensation rate for the staff most likely to complete the task. We then multiplied this result by the expected number of changes or modifications per ye ar. We esti mated that the annual labor cost for this failure reporting requirement would be $ 168 to industry

and $ 68 to BSEE. 2 , 3 b. N otifying BSEE of specified production safety issues Sections 250.825(b), 250.831, 250.833, 250.837(c)(5), 250.838(c), 250.874(f), and 250.874(g)(2) introduce new notification requirements for industry
. The provisions require industry to notify

BSEE of occurrences in which: (1) an operator is unable to test valves and sensors; (2) the ability to monitor casing pressure is affected; (3) an underwater safety valve (USV 1 ty pe ) fails to operate properly and an operator designates a USV2 or qualified valve as the USV1 ; (4) an operator resumes production after an event in which wells were secured; or (5) an operator experiences loss of communication. These requirements are intended to ensure that

2 We assumed that industry staff (mid
- level p etroleum e ngineer) would spend 2 hours to prepare a submittal of design changes or modified procedures. We determined the average hourly wage rate for a petroleum engineer ($58.79) by taking the median wage rate for a petroleum engineer in the United States according to the Burea u of Labor Statistics (BLS) ( http://www.bls.gov/oes/current/oes172171.htm ) . We then multiplied this rate by a private
sector loaded wage factor of 1.43 from the BLS index to account for employee benefits, resulting in an hourly compensation rate of $84.07. We assumed that one submittal would be prepared each year. We then multiplied the number of hours per submittal by the average hourly compensation rate and by the estimated number of submittals per year to obtain an estimated total annual labor cost of $1 68.14 (2 x $ 84 .07 x 1) to industry for this provision. 3 We assumed that BSEE staff ( petroleum e ngineer, GS
- 12, step 5) would spend 1 hour to receive and review each submittal of design changes or modified procedures. We determined the average hourly wage rate for a GS
- 12, step 5 employee ($41.52) by averaging the GS

- 12, step 5 wage rates for the Houston metropolitan area and the temporary wage rate in effect until 2013 for Jefferson, Lake Charles, and Houma, Louisiana ($41.91) for 2012 and 2013, and the av erage of the GS
- 12, step 5 wage rates for the Houston metropolitan area and the of rest of the United States for 2014 through 2021. We then multiplied this rate by a federal loaded wage factor of 1.69 derived from the U.S. Department of Labor’s analysis of overhead costs averaged over employees of the Department (we used this loaded wage factor of 1.69 in the absence of a similar estimate for BSEE). This results in an average hourly compensation rate of $70.17 for 2012 and 2013, and $67.18 for 2014 through 2021. We multiplied the number of BSEE staff hours per submittal by the average hourly compensation rate and the estimated number of submittals per year ( 1 ) to obtain an estimated total annual labor cost to BSEE for this provision of $70.17 (1 x $70.17 x 1 ) for 2012 and 2013, and $67.18 (1 x $67.18 x 1) for 2014 through 2021.11

industry and BSEE remain informed of issues related to equipment testing, monitoring, and operation. These new notification requirements would result in minimal increase s in industry and BSEE staff time. We estimated l abor costs for industry by multiplying the time required to notify BSEE for each typ e of occurrence by the average hourl y compensation rate for the staff most likely

to complete the task, and by the number of expected occurrences each year. The BSEE anticipate s few (10 in total) occurrences warranting notifications under these provisions per year . For industry , we estimated the annual labor costs for the notification requirements related to these five categories of occurrences to be: (1) $ 252 ; (2) $ 168 ; (3) $ 84 ; (4) $ 42; and (5) $ 42. 4 We then summed these costs, resulting in an estimated total annual labor cost of $ 588 ($252 + $168 + $84 + $42 + $42) to industry
. Similarly , we estimated the labor costs of this provision to BSEE by

multiplying the time required to receive and respond to a notification by the average hourl y compensation rate of BSEE clerical staff and by the number of expected
occurrences. We estimated the annual labor cost for this provision to be $95 to BSEE
. 5

4 We assumed that the time required for industry staff (mid
- level p etroleum engineer) to notify BSEE of an occurrence in the five categories identified above would be: (1) 0.5 hours; ( 2) 2 hours; (3) 1 hour; (4) 0.5 hours; and (5) 0.5 hours. We determined the average hourly wage rate for a p etroleum e ngineer ($58.79) by taking the median wage rate for a petroleum engineer in the United States according to the BLS (http://www.bls.gov/oes /current/oes172171.htm). We then multiplied this rate by a private

- sector loaded wage factor of 1.43 from the U.S. Bureau of Labor Statistics’ index for salary and benefits to account for employee benefits, resulting in an hourly compensation rate of $84.0 7 . We assumed that, for the five categories, the annual number of notifications would be: (1) 6; (2) 1; (3) 1; (4) 1; and (5) 1. We multiplied the number of staff hours per notification by the average hourly compensation rate and by the estimated number of notifications per year to obtain an estimated total annual labor cost to industry for each category identified in these provisions. The resulting industry costs are as follows: (1) 0.5 x $ 84.07 x 6 = $ 252.21 ; (2) 2 x $ 84.07 x 1 = $ 168.14 ; (3) 1 x $ 84.07 x 1 = $ 84 .07 ; (4) 0.5 x $ 84.07 x 1 = $42 .03 ; and (5) 0.5 x $ 84.07 x 1 = $ 42 .03. We then summed these costs to obtain a total annual labor cost to industry of $ 588.49 ($252.21 + $168.14 + $84.07+ $42 .03 + $42 .03). 5 We assumed that BSEE staff (a clerical worker, GS
- 7, step 5) would spend 0.25 hours to receive and respond to each notification, regardless of the category of incident requiring the notification. We determined the average hourly wage rate for a GS
- 7, step 5 employee ( $22.41 ) by averaging the GS
- 7, step 5 wage rates for the Houston metropolitan area and for the rest of the United States. We then multiplied this rate by a federal loaded wage factor of 1. 69, resulting in a loaded average hourly compensation r ate of $37.87. Using the same number of12

c. Certification for designs of mechanical and electrical systems Section 250.842(b) introduces a requirement stating that , in its production safety s ys tem application, an operator must include certification(s) that the designs for mechanical and electrical systems were reviewed, approved, and stamped by a registered professional engineer. The engineers used for this certification must be registered in a State or Territory in the United States and have sufficient expertise and experience to perform the duties. Th e requirement to include certification(s) of m echanical and electrical sy stem designs in the productio n safety s ys tem application would result in an increase in industry staff tim e. Although these certification requirements would be consolidated into the application process upon rule promulgation , they were broken out in this analy sis to capture potential costs that could result from this p roposed r ule. We calculated the labor cost b y multiplying the time required to certify

the designs by

the average hourly

compensation rate of the staff most likely to complete the certification and by the number of certifications per ye ar. We estimated the annual labor costs for th is certification requirement to be $1 6,141 to industry
. 6 The BSEE does not expect to incur any costs as a result of this provision.

expected occurrences as identified for industry, we assumed a total of 10 notifications per year to which BSEE staff would need to respond. We multiplied the number of BSEE staff hours by the average hourly compensat ion rate and the estimated number of notifications per year to obtain an estimated total annual labor cost to BSEE of $94.68 (0.25 x $37.87 x 10). 6 We assumed that industry staff (mid
- level p etroleum e ngineer) would spend 6 hours to certify designs of mec hanical and electrical systems and include the certifications in the application. We determined the average hourly wage rate for a p etroleum e ngineer ($58.79) by taking the median wage rate for a petroleum engineer in the United States according to the BLS (http://www.bls.gov/oes/current/oes172171.htm). We then multiplied this rate by a private
- sector loaded wage factor of 1.43 from the BLS index to account for employee benefits , resulting in an hourly compensation rate of $84.07. We estimated that 32 certi fications would be conducted each year. We multiplied the number of hours per certification by the average hourly compensation rate and by the estimated annual number of certifications to obtain an estimated total annual labor cost of $1 6,141.38 (6 x $ 84.0 7 x 32) to industry for this provision.13

d. Certification letter for mechanical and electrical systems installed in accordance with approved designs Section 250.842(c ) requires operators to submit a certification letter to the BSEE District Manager stating that mechanical and electrical systems were installed in accordance with approved designs, before starting production. Th e requirement to send a letter to the Distri ct Manager to certify the installation of mech anical and electrical systems would result in increased annual labor costs for industry and BSEE
. We assumed that industry staff would spend 6 hours to certify the installation , with an estimated 32 certifications being conducted each year. We estimated the labor cost of this provision by

multiplying the staff time b y the number of certifications and by the average hourl y compensation rate of the staff most likely to perform this task
. We assumed that BSEE staff time to receive and process the certification letters would be minimal (approximately 0.5 hours per letter)
. We estimated the annual labor cost for this certification requirement to be $1 6,141 to industry and $60 6 to BSEE
. 7 , 8

7 We assumed that industry staff (mid
- level p etroleum e ngineer) would spend 6 hours to certify designs of mechanical and electrical systems and include the certifications in the application. We determined the average hourly wage rate for a p etroleum e ngineer ($58.79) by taking the median wage rate for a petroleum engineer in the United States according to the BLS (http://www.bls.gov/oes/current/oes172171.htm). We then multiplied this rate by a private
- sector loaded wa ge factor of 1.43 from the BLS index to account for employee benefits, resulting in an hourly compensation rate of $84.07. We estimated that 32 certifications would be conducted each year. We multiplied the number of hours per certification by the average hourly compensation rate and by the estimated annual number of certifications to obtain an estimated total annual labor cost of $16,141.38 (6 x $84.07 x 32) to industry for this provision. 8 We assume d that BSEE staff (clerical work er, GS
- 7, step 5) would spend 0. 5 hours to receive and process each certification letter
. We determined the average hourly wage rate for a GS
- 7, step 5 employee ( $22.41 ) by averaging the GS
- 7, step 5 wage rates for the Houston metropolitan area and for the rest of the United Stat es. We then multiplied this rate by a federal loaded wage factor of 1. 69, resulting in a loaded average hourly compensation rate of $37.87. We assumed that 32 certification letters would be submitted each year (These estimates are based on historical submi ttals and projections from regional offices). We multiplied the number of hours per certification letter by the average hourly compensation rate and by the estimated number of letters per year (0.5 x $37.87 x 32) to obtain an estimated total annual labor c ost of $ 605.97 to BSEE for this provision.14

e. Certification of as
- built diagrams of schematic piping and instrumentation diagram and the safety anal ys is flow diagram Section 250.842(d) require s the as - built schematic piping and instrumentation diagrams and the safety anal ys is flow diagram to be certified and stamped by a registered professional engineer. The engineer used by operators for this task must be registered in a State or Territory in the United States and have sufficient expertise and exp erience to perform the duties. A certification letter must be sent to the District Manager within 60 day s after production. Per Section 250.842(e), the as
- built diagrams must also be submitted to the District Manager within 60 day s after production. The requirements to certify the as
- built diagrams and submit the certification letter and diagr ams to the District Manager would result in increased labor costs to industry and BSEE. We calculated industry

labor costs by

multiplying the time spent certifying and submitting the diagrams b y the hourl y compensation rate of the staff most likely to complete the task, and by the number of submissions expected each ye ar. We calculated BSEE’s labor cost s using a similar method, with time required to receive and process the submiss ions multiplied by the BSEE District Manager’s hourly compensation , and by the number of expected submissions
. We estimated the annual labor cost for these certification requirements to be $22,605 to industry and $1,510 to BSEE
. 9 , 10

9 We assumed that industry staff ( professional engineer, supervisory) would spend 6.5 hours for each certification and submittal of as
- built diagrams . The average hourly wage rate for a professional engineer, supe rvisory is $76.00, based on BSEE’s Supporting Statement A (BSEE Production Safety Systems) . We then multiplied this rate by a private sector loaded wage factor of 1.43 from the BLS index to account for employee benefits , resulting in a loaded average hourl y compensation rate of $108.68. We assumed that 32 certifications would be conducted each year. We then multiplied the number of hours per certification and submittal by the average hourly compensation rate and by the estimated number of certifications and submittals per year to obtain an estimated total annual labor cost of $22,605.44 (6 .5 x $108.68 x 32) to industry for this provision.15

f. As
- built piping and instrumentation diagrams must be maintained at a secure onshore location Section 250.842(f) introduces a new requirement for operators to maintain as - built piping and instrumentation diagrams at a secure onshore location. The provision indicates that the records must be readil y available to BSEE upon reques t , for the life of the OCS facility
. Th e requirement to maintain documentation of the piping and instrumentation designs would result in a minimal increase in industry staff time ( estimated at 0.5 hours per record)
. We estimated labor costs for industry by multiplying this time estimate by the average hourl y compensation rate for the staff most likely to complete this task, and by the number of records expected per ye ar (approximately 32)
. We estimated the annual labor costs for these information maintenance requirements to be $480 to industry
. 11 The BSEE does not expect to incur any costs as a result of this provision
.

10 We assumed that BSEE staff ( District Manager, GS
- 14, step 5 ) would spend 0.5 hours to receive and process each submittal of as - built diagrams. We determined the average hourly wage rate for a GS
- 14 , step 5 employee ($55.86) by averaging the GS
- 14 , step 5 wage rates for the Houston metropolitan area and for the rest of the United States. We then multiplied this rate by a federal loaded wage factor of 1.69 to obtain a loaded average hourly compensation rate of $94.39. We assumed that 32 submittals would be received each year. We multiplied the number of hours per submittal by the average hourl y compensation rate and by the estimated number of submittals per year to obtain an estimated total annual labor cost of $1,510.32 (0.5 x $94.39 x 32) to BSEE for this provision. 11 We assumed that industry staff ( field office administrator, clerical ) would spend 0.5 hours to maintain each record of as - built diagrams. The average hourly wage rate for a professional engineer, supervisory is $21.00, based on BSEE’s Supporting Statement A (BSEE Production Safety Systems) . We then multiplied this rate by a priva te sector loaded wage factor of 1.43 from the BLS index to account for employee benefits , resulting in a loaded average hourly compensation rate of $30.03
. We estimated that 32 records would be maintained each year. We multiplied the number of hours per record by the average hourly compensation rate and by the estimated number of records per year to obtain an estimated total annual labor cost of $480.48 ( 0.5 x $ 30.03 x 32) to industry for this provision
.16

g. Inspection, testing, and certification of foam firef ighting s ys tems S ection 250.861 address es the use of foam firefighting s ys tems. This provision requires
operators that install foam firefighting s ys tems , to inspect the foam concentrates , and their storage containers and send samples to the manufacturer or authorized representative for quality condition testing and certification , on an annual basis
. This provision also requires operators to maintain the certification documentation so that it is available for field inspections. As an alternative to testing and certificati on, the operator could replace the total inventory
. The requirements to inspect, test, and certif y foam firefighting s ys tems would result in increased annual labor costs for industry (an estimated 2 hours per sy stem) and annual materials costs to ship the foam sample s . To calculate indus try labor costs, we multiplied this 2
- hour time estimate by

the average hourly

compensation rate of the appropriate industry staff and the estimated number of s ys tems subject to this provision for each year . We estimated the cost for materials b y assuming the cost would be that of a small flat rate shipping box from the U.S. Postal Service, and multiplying this cost by the total number of foam samples per year. By summing the labor and materials costs, we determined that the average annual cost for these requirements would be an estimated $9 8,434 to industry ( $94,195 in the first year, increasing by $9 42 each ye ar due to the expected installation of five new foam firefighting sy stems per ye ar)
. 12 The BSEE does not expect to incur any costs as a result of this provision.

12 We assumed that industry staff (drilling operato r, management ) would spend 2 hours for the inspection, testing, and certification of each foam firefighting system . The hourly wage rate used for a drilling operator (management) is $64.00, based on BSEE’s Supporting Statement A (BSEE Production Safety Sys tems) . This rate is multiplied by a private sector loaded wage factor of 1.43 from the BLS index to account for employee benefits. The calculation yields a loaded hourly compensation of $ 91.52
. We estimate that there are currently 500 foam firefighting sys tems installed and that 5 new systems would be installed each year (These estimates are based on historical submittals and projections from regional offices)
. Multiplying the number of hours per system , the hourly compensation , and the estimated number of systems per year (2 x $91.52 x 500 in first year) generates an estimated total annual labor17

h. inspection of fired and exhaust heated components Section 250.876 would require certain tube
- ty pe heaters to be removed, inspected, repaired, or replaced every

5 years by

a qualified third party. The re quirement to inspect certain fired and exhaust heated components would result in additional inspection costs. There are approximately 1500 fired and exhaust heated components on the OCS that would need to be inspected every 5 years. The cost associated w ith each component inspection is approximately $5,000. Because every

component would not need to be inspected at the effective date of the rule we averaged the annual number of inspections over the 10 year period, resulting in an average of 300 component inspections per ye ar. This estimate does not take into account the fact that operators might already be performing some of these inspections. We estimated the annual cost for inspection of fired and exhaust heated components to be $1.5 million (300 comp onents x $5,000 per component = $1,500,000). i. Submission of contact list for OCS platforms Section 250.890 (c) introduces a new requirement for each operator to submit a contact list for all OCS platforms to the BSEE District Manager
. Operators also would be required to
re submit the information whenever it is revised.

cost to industry of $91,520.00 in the first year. We repeat this calculation for each year using the number of systems expected for the given year, and average the results to obtain an estimated average annual labor cost of $95,638.40 for this provision. We then added to the labor cost the materials cost, assuming a small flat rate shipping box ($5.35) from the United States Postal Service would be used. Multiplying the cost for shipping by the total number of samples per year yields a total materials cost of $2,675.00 (500 in the first year x $5.35). We repeated this calculation for each year using the number of systems expected for the given year, and averaged the results to obtain an estimated average annual materials cost of $2,795.38 for this provision. We estimated the total costs for labor and materials at $94,195.00 for the first year of rule implementation.18

The requirement to compile and submit contact information would result in a minimal increase in industry

labor time (an estimated 0.5 hours per contact list)
. We calculat ed the industry labor cost by

multiplying the time estimate per list by the average hourly

compensation rate of a field office administrator , and by the number of lists submitted each year . The number of lists submitted includes both new submissions (approximately 1,000 ) and a limited number of revised lists (an estimated 100) each ye ar . We estimated the annual labor costs for this reporting requirement to be $16,51 7 to industry and $10,415 to BSEE
. 13 , 14 j. Industry

familiarization with new regulations When the new regulation take s effect, industry will need to read and interpret the rule. Through this review, operators will familiarize themselves with the new structure of the rule and identify any new provisions relevant to their operations. Operators will evaluat e whether any new action must be taken to achieve compliance with the rule. This review will be facilitated b y the plain language and improved structure of the p roposed r ule. Reviewing the new regulations require staff time, imposing a one
- time labor cost on industry
. We estimated the one
- time labor cost b y multiplyingthe time required for an administrator at

13 We assumed that industry staff ( field office administrator, clerical) would spend 0.5 hours to submit a new or revised contact list
. The average hourly wage rate for a field office administrator (clerical) is $21.00, based on BSEE’s Supporting Statement A (BSEE Production Safety Systems) . We then mul tiplied this rate by a private sector loaded wage factor of 1.43 from the BLS index to account for employee benefits , resulting in a loaded average hourly compensation rate of $30.03
. We assumed that 1,000 new contact lists and 100 revised lists would be s ubmitted each year. We multiplied the number of hours per list by the average hourly compensation rate and by the number of lists per year to obtain an estimated total annual labor cost of $16,516.50 ( 0.5 x $ 30.03 x 1,100 ) to industry for this provision
. 14 We assumed that BSEE staff (clerical worker, GS
- 7, step 5) would spend 0.25 hours to receive and process each contact list submitted by industry. We determined the average hourly wage rate for a GS
- 7 , step 5 employee ($22.41) by averaging the GS
- 14 , step 5 wage rates for the Houston metropolitan area and for the rest of the United States. We then multiplied this rate by a federal loaded wage factor of 1.69 to obtain a loaded average hourly compensation rate of $37.87
. We assumed a total of 1,100 contact list submissions per year. We multiplied the number of hours per list by the average hourly compensation rate and by the number of lists submitted per year to obtain an estimated total annual labor cost of $10,415.05 (0.25 x $37.87 x 1,100) to BSEE for thi s provision.19

each field office to review the rule b y the total number of field offices. This calculation yielded a total one
- time cost to industry of $28,2 57. 15
5. Summary

of the cost analy sis Exhibit 1 summarizes the cost for the p roposed r ule by provision
. Exhibit 2 display s the monetized costs as annual summations of the calculations described above. 

### E **XHIBIT** 

### 1 **: C**  **OST OF THE** 

### P **ROPOSED** 

### R**ULE BY** 

### P **ROVISION Average**  **Annual Cost**  **(undiscounted) Percent**  **Industry Share**  **Government**

**Share** Reporting after a failure of SPPE equipment $236 0% 71% 29% Notifying BSEE of production safety issues $683 0% 86% 14% Certification, submission, and maintenance of designs and diagrams $57,485 3% 96% 4% Inspection, testing, and certification of foam firefighting systems $98,433.78 6% 100% 0% Inspection of fired and exhaust heated components $1,500,000.00 89% 100% 0% Submission of contact list for OCS platforms $26,932 2% 61% 39% Industry familiarization with new regulations (one time cost) $28,257 2% 100% 0% **TOTAL** $1,686,595.06 100% 99% 1%

15 We assumed that industry staff ( professional engineer, supervisory ) would spend 2 hours to review the new regulations . The average hourly wage rate for a professional engineer (supervisory) is $ 76 .00, based on BSEE’s Supporting Statement A ( BSEE Production Safety Systems). We then multiplied this rate by a private sector loaded wage factor of 1.43 from the BLS index to account for employee benefits, resulting in a loaded average hourly compensation rate of $ 108.68
. We assumed that a staff per son at each field office would review the new regulation at each of the 130 field offices. Multiplying the number of hours per review by the average hourly compensation rate and by the number of field offices produced an estimated total one - time labor cost of $ 28,256.80 ( 2 x $ 108.68 x 130 ) to industry.20 

### E **XHIBIT** 

### 2 **: S**  **UMMARY OF** 

### M **ONETIZED** 

### C **OSTS Year**  **Monetized Costs (2011 dollars/year)**  1 **2012** $1,707,790 2 **2013** $1,680,475 3 **2014** $1,681,414 4 **2015** $1,682,356 5 **2016** $1,683,298 6 **2017** $1,684,240 7 **2018** $1,685,182 8 **2019** $1,686,124 9 **2020** $1,687,066 10 **2021** $1,688,008 **Undiscounted 10 -**  **year T**  **otal $16,865,951**  **10 -**  **Year Total with 3% discounting $14,388,372**  **10 -**  **Year Total with 7% discounting**  **$11,848,836**
6. Benefits Anal ys is The p roposed r

ule would result in benefits to society in two way s, 1) by reducing the probability

of incidents resulting in oil spills and worker injuries and 2) b y evaluating the increase of the allowable leakage rates for certain safety valves to address the unnecessary repair or replacement of certain safety valves
. For oil spills and injuries, the magnitude of these benefits, however, is uncertain and highl y dependent on the actual reduction in the probability of oil spills and injuries the p roposed r ule would achieve. Due to this uncertainty , BSEE was not able to perform a standard cost
- benefit anal ys is estimating the net benefits of the p roposed r ule
. As is common in situations where regulatory benefits are highly

uncertain, we conducted a break
- even anal ys is, which estimates the minimum risk reduction the p roposed r ule would need to achieve for the rule to be cost
- beneficial. In the form of a sensitivity analy sis, we also applied a risk
- based approach to cost
- benefit anal ys is by calculating net benefits of the p roposed r ule21

over a range of possible risk reduction levels that could be achieved by the p roposed r

ule . In this section, we describe the data, methods, and results of the benefits anal ys is.

a. Data To estimate the maximum amount of potential costs from oil spills that the p roposed r ule could potentially

prevent, we used spill data to estimate the damages from incidents on OCS facilities a ffected b y the rule. 16 We used disaggregated spill data to quantify the total amount of oil spilled and number of spills over the 10
- ye ar period from 2001 to 2010. 17 The BSEE database collects information for all spills greater than 10 barrels. We estimated the annual number of barrels of oil spilled by multiplying the average number of spills per year from affected facilities (22.1) b y the average amount of oil spilled per spill (183.8). 18 This calculation resulted in an average of 4,063 (22.1 x 1 83.8) barrels of oil spilled per year. To estimate the cost of oil spills, we multiplied the annual amount of oil spilled (4,063) by the value of a barrel of oil spilled ($2,373), as estimated in previous BSEE regulatory anal ys es. 19 This calculation resulted in a maximum potential avoided cost of $9,640,019 (4,063 x $2,373) from the p roposed r ule for preventing oil spills.

16 We focused the analysis on incidents associated with the following types of operations, expected to be affected by the Proposed Rule: completion; completion/workover; completion/workover/motor vessel; const ruction; deactivation; decommissioning; decommissioning and PA; hurricane; hurricane repair; hurricane salvage; offloading; pipeline; pipeline/motor vessel; pipeline/barge; plugging and abandonment; production; production/barge; production/construction; pr oduction/motor vessel; production/workover; workover; and workover/motor vessel. 17 Source: http://www.bsee.gov/Inspection

- and
- Enforcement/Accidents

- and
- Incidents/Spills

---- Statistics
- and
Summaries
- 1996
- 2011.aspx 18 Over the 10
- year period , 221 spills greate r than 10 barrels were recorded in the data for an average rate of 22.1 spills per year. These spills accounted for 40,629 barrels of oil spilled, for an average of 183.8 (40,629 / 221) barrels of oil spilled per incident. The average amount of oil spilled per year was thus 40,629/10 = 183.8 x 22.1 = 4,062.9 19 The value of a barrel of oil spill was obtained from the Regulatory Impact Analysis for the Increased Safety Measures for Energy Development on the Outer Continental Shelf rule, $2,300, adjusted for inflation from 2009 to 2011 using the BLS inflation index of 1.0316 ( http://www.bls.gov/data/inflation_calculator.htm ).22

We then used a similar procedure to estimate the maximum level of benefits of the p roposed
r ule resulting from potentially avoided inj uries and fatalities. One complicating factor of this anal ys is, however, was that BSEE does not collect data on injuries and fatalities by facility ; so it was not possible to determine how many of the reported injuries and fatalities occurred on facilities affected b y the p roposed r ule. We first aggregated data for injuries and fatalities from incidents on all OCS facilities from 2007 to 2011. 20 For fatalities, there was more available data on each incident and we were able to better evaluate . Upon further review of fatalities, it was determined that none of the fatalities were directly connected to the provisions of the proposed rule; therefore we excluded the potential reduction of fatalities from the analysis. To estimate the rate of injuries occurring onl y on those facilities affected b y the p roposed r ule, we used the ratio of oil spills on affected facilities to oil spills on all facilities to approximate the proportion of all injuries that might have occurred on affected facilities. As presented in Exhibit 3 , we multiplied the reported annual number of injuries and fatalities b y the ratio discussed above (oil spills on affected facilities divided by oil spills on all facilities) to obtain the estimated number of injuries on facilities a ffected by the p roposed r

ule (As shown in column 5 of Exhibit 3)
. 21 We then calculated the average annual rates of potentially avoided injuries by

dividing the total counts of injuries by

the number of years (5).

20 Source: http://www.bsee.gov/Inspection

- and
- Enforcement/Accidents

- and
- Incidents/Listing

- and
- Status
- of
Accident
- Investigations.aspx 21 T he ratio of oil spills on affected facilities divided by oil spills on all facilities was (221 / 335) = 0.6597 over the 10

- year period.23



### E **XHIBIT** 

### 3 **: E**  **STIMATION OF** 

### F **ATALITIES AND** 

### I **NJURIES ON**  

### A**FFECTED** 

### F **ACILITIES Y**  **ear L**  **ocation Reported OCS I**  **ncidents Estimated OCS**  **I ncidents**  ***** **Fatalities Injuries**  **Injuries 2007**  **Gulf of**

**Mexico** 5 423 279 **Pacific** 0 17 11 **2008 Gulf of** 

**Mexico** 11 318 210 **Pacific** 0 14 9 **2009 Gulf of** 

**Mexico** 4 285 188 **Pacific** 0 16 11 **2010 Gulf of** 

**Mexico** 12 273 180 **Pacific** 0 12 8 **2011 Gulf of** 

**Mexico** 3 213 141 **Pacific** 0 18 12 **Total 35**  **1 ,**  **589 1,048**  **Average Annual Total 7**  **31 8**  **210** ***** Estimated fatalities and injuries are rounded to the nearest whole number.
We then estimated the maximum level of benefits arising from potential ly avoided injuries by multiplying the average annual number of avoided injuries by the values ascribed to injuries in previous BSEE regulatory anal ys es. 22 These calculations resulted in an annual average avoided cost of injuries of $9.7 million (210 x $46,422). We then summed the avoided costs from spills and injuries to obtain a maximum total annual cost of roughl y $ 19.4 million that could potentially

be avoided by

the p roposed r

ule. To estimate the potential costs from the unnecessary repair or replacement of certain safety valves due to a higher allowable leakage rate that the proposed rule could potentially prevent, we

22 We used values taken from the Regulatory Impact Analysis for the Increased Safety Measures for Energy Development on t he Outer Continental Shelf to monetize injuries. In this regulatory analysis, we monetized injuries at $46,422 ($45,000 adjusted for inflation from 2009 to 2011 using the BLS inflation index of 1.0316) per non - fatal injury. We obtained the inflation index at http://www.bls.gov/data/inflation_calculator.htm
.24

used data from inspection records from OCS facilities affected b y the rule. Of the active wells on the OCS, there have been 57 incidents associated with the leakage rates that could be affected by the rule . The potential costs from the unnecessary repair or replacement of certain safety valves consists of $22,000 labor costs and an additional $5,000 equipment replacement costs. We estimated the potential annual avoided costs for increasing the allowable leakage rate to be approximately

$1.54 million (57 incidents avoided x ($22,000 labo r cost + $5,000 equipment cost) = $1,539,000). We then calculated the maximum total 10
- ye ar costs due to damages that the p roposed r ule could potentially prevent under 3 and 7 percent discounting, as presented in Exhibit 4
.



### E **XHIBIT** 

### 4 **: E**  **ST IM** **ATION OF** 

### M**AXIMUM** 

### P **OTENTIAL** 

### A**NNUAL** 

### A**VOIDED** 

### C **OSTS OF** 

### P **ROPOSED** 

### R**ULE Number**  **(A) Unit Cost** 

**(B) Avoided Cost** 

**(C = A x B) Average Annual Barrels of Oil Spilled**  4,093 $2,373 $9,640,019 **Average Annual Injuries**  210 $46,422 $9,732,518 **Average Annual unnecessary repair**  **or replacem**  **ent of certain safety valves due to a higher allowable leakage rate**  57 $27,000 $1,539,000 **Total Potential**  **Annual Avoided Cost $**  **20,911,536 Total 10**  **- year**  **Potential Avoided Cost (Undiscounted)**  **$ 209,115,363**  **Total 10 -** **year Potential**  **Avoided Cost (3% Discounting)**  **$ 178,379,646**  **Total 10 -** **year Potential**  **Avoided Cost (7% Discounting) $**  **146,873,880**
b. Methods The results from the analy sis of incident data show an annual average of $ 20.9 million dollars annuall y on affected OCS facilities due to unnecessary repair or replacement of certain safety valves due to a higher allowable leakage rate, oil spills, and injuries. While the p roposed
r ule is aimed at preventing these incidents, the actual reduction in risk of incidents that the p roposed r

ule would achieve is unknown. As recommend by OMB Circular A
- 4 for situations25

where regulatory

benefits are highl y uncertain, we conducted a break
- even analy sis of the p roposed r

ule. Break
- even anal ys is is a widel y- used method to estimate the minimum ris k reduction needed for a regulation to result in benefits that are at least equal to its costs. This minimum risk reduction is calculated b y dividing the total net costs (costs minus cost savings) of a regulation b y the costs of incidents the regulation i s expected to potential ly avoid. In addition to estimating the break
- even risk reduction level, we used a risk
- based approach to cost - benefit analy sis to estimate the potential net benefits of the p roposed r ule over a range of possible risk reduction levels. Risk
- based cost
- benefit anal ys is involves estimating net benefits over a range of risk reduction levels that the regulation could achieve
.
c. Analy sis r esults Using the estimated costs and the potential benefits (in terms of avoided costs of incidents) of the Proposed Rule as estimated above, we calculated the break
- even risk reduction level of the p roposed r

ule under discount rates of 3 and 7 percent. As presented in Exhibit 5 , the break
- even risk reduction level is less than 9 percent under both discount rate s. This result demonstrates that only a small reduction in the risk of incidents on affected OCS facilities would be needed for the p roposed r

ule to be c ost - beneficial. 

### E **XHIBIT** 

### 5 **: E**  **ST IM** **ATION OF** 

### B **REAK**

### - **E VEN**  

### R**ISK** 

### R**EDUCTION** 

### L **EVEL Undiscounted**  **3% Discount Rate 7% Discount Rate**  **Total 10 -** **year Cost of Proposed Rule** $16,865,951 $14,388,372 $11,848,836 **Annualized Cost of Proposed Rule** $1,686,756 $1,687,008 **Potential 10 -**  **year Benefit of Proposed Rule** $209,115,363 $178,379,646 $146,873,880 **Potential Annualized Benefit of Proposed Rule** $20,911,536 $20,911,536 **Break -**  **Even Risk Reduction Level** 8.065% 8.066% 8.067%26

Exhibit 6 presents the results of the risk
- based cost
- benefit anal ys is for a range of risk reduction levels between 0 and 2 0 percent. For each possible risk reduction level, we first estimated total benefits b y multiplying the maximum 10
- year potential avoided cost s from incidents on affected OCS facilities by

the assumed risk reduction level. We then subtracted the total costs of the p roposed r

ule from the estimated benefits for each risk reduction level to obtain the estimated net benefits. As presented in Exhib it 6 , net benefits of the p roposed r ule are positive for risk reduction levels of 8 percent or greater. 

### E **XHIBIT** 

### 6 **: R** **ISK**

### - **B ASED**  

### C **OST** 

### - **B ENEFIT**  

### A**NALYSIS OF** 

### P **ROPOSED** 

### R**ULE Risk Reduction Level**  **Annual Net Benefits 10**  **- Year Total Net Benefits**  **3% Discounting 7%**  **Discounting 3% Discounting**  **7% Discounting 0.0%**  - $1,686,756

- $1,687,008

- $14,388,372

- $11,848,836 **1.0%** - $1,477,641

- $1,477,892

- $12,604,576

- $10,380,097 **2.0%** - $1,268,525

- $1,268,777

- $10,820,779

- $8,911,359 **3.0%** - $1,059,410

- $1,059,662

- $9,036,983

- $7,442,620 **4.0%** - $850,295

- $850,546

- $7,253,186

- $5,973,881 **5.0%** - $641,179

- $641,431

- $5,469,390

- $4,505,142 **6.0%** - $432,064

- $432,316

- $3,685,593

- $3,036,403 **7.0%** - $222,949

- $223,200

- $1,901,797

- $1,567,665 **8.0%** - $13,833

- $14,085

- $118,000

- $98,926 **9.0%** $195,282 $195,031 $1,665,796 $1,369,813 **10.0%** $404,397 $404,146 $3,449,592 $2,838,552 **11.0%** $613,513 $613,261 $5,233,389 $4,307,291 **12.0%** $822,628 $822,377 $7,017,185 $5,776,029 **13.0%** $1,031,744 $1,031,492 $8,800,982 $7,244,768 **14.0%** $1,240,859 $1,240,607 $10,584,778 $8,713,507 **15.0%** $1,449,974 $1,449,723 $12,368,575 $10,182,246 **16.0%** $1,659,090 $1,658,838 $14,152,371 $11,650,985 **17.0%** $1,868,205 $1,867,953 $15,936,168 $13,119,723 **18.0%** $2,077,320 $2,077,069 $17,719,964 $14,588,462 **19.0%** $2,286,436 $2,286,184 $19,503,761 $16,057,201 **20.0%** $2,495,551 $2,495,300 $21,287,557 $17,525,940 The BSEE has concluded that after consideration of the impacts of this NPRM, the societal benefits of the p roposed rule justify the societal costs.27

**B. REGULATORY FLEXIBILITY ANALYSIS**  The Regulatory

Flexibility

Act (RFA) at 5 U.S.C. 603 requires agencies to prepare a regulatory

flexibility

analy sis to determine whether a regulation will have a significant economic impact on a substantial number of small entities. Section 605 of the RFA allows an agency to certify a rule in lieu of preparing an anal ys is if the regulation is not expected to have a significant economic impact on a substantial number of small entities. Further, under the Small Business Regulatory

Enforcement Fairness Act of 1996, 5 U.S.C. 801 (SBREFA), an agency is required to produce compliance guidance for small entities if the rule has a significant economic impact. For the reasons explained in this section, BSEE believes this r ule is not likely

to have a significant economic impact and, therefore, an initial regulatory flexibility

anal ys is is not required b y the RFA. However, in the interest of transparency , we have prepared the following Initial Regulatory

Flexibility

Anal ys is (IRFA) to assess the impact of this proposed rule on small entities, as defined b y the applicable Small Business Administration (SBA) size standards. 1. Description of the Reasons That Action by the Agency

I s Being Considered The BSEE identified a need to revise Subpart H, Oil and Gas Production Safety S ys tems, which addresses production safety s ys tems, subsurface safety devices, and safety device testing used in oil and natural gas production on the OCS, among other issues. These systems play a critical role in protecting workers and the environment. However, BSEE has not revised the regulation since its publication in 1988 (53 FR 10690). Since that time, oil and gas production on the OCS has moved into deeper waters, introducing new challenges for indus try and BSEE. Many of the new provisions in the proposed rule would codify BSEE guidance and incorporate current industry

practice. In addition, the wording and structure of the 1988 rule creates confusion about the requirements. The BSEE has rewritten and reorganized the rule to clarify existing requirements and highlight important information. These revisions would significantl y improve the readability

of the regulation.28

2. Description and Estimated Number of Small Entities Regulated A small entity

is one that is “independentl y owned and operated and which is not dominant in its field of operation.” The definition of small business varies from industry to industry in order to properl y reflect industry size differences. The proposed rule would affect operators and holders of Federal oil and gas leases, as well as pipeline right
- of

- way holders, on the OCS. The BSEE’s anal ys is shows that this includes about 130 companies with active operations. Entities that operate under this rule fall under the SBA’s North American Industry Classification System (NAI CS) codes 211111 (Crude Petroleum and Natural Gas Extraction) and 213111 (Drilling Oil and Gas Wells). For these NAICS classifications, a small company is defined as one with fewer than 500 employees. Bas ed on this criterion, approximately

90 (69 percent) of the companies operating on the OCS are considered small and the rest are considered large businesses. Therefore, BSEE estimates that the proposed rule would affect a substantial number of small entiti es. 3. Description and Estimate of Compliance Requirements The BSEE has estimated the incremental costs for small operators, lease holders, and right
of
- way holders in the offshore oil and natural gas production industry . Costs that already existed
as a res ult of the 1988 rule, DWOPs, and currently
- incorporated API standards were not considered as costs of this rule because they are part of the baseline. We have estimated the costs of the following provisions of the proposed rule: (a) reporting after a fai lure of SPPE equipment; (b) notifying BSEE about production technical issues; (c) certification, submission, and maintenance of designs and diagrams; (d) inspection, testing, and certification of foam firefighting s ys tems; (e) inspection of fired and exhau st heated components; (f) submission of contact list for OCS platforms; and (g) familiarization with the new regulation.29

a. Reporting after a failure of SPPE equipment The proposed rule requires operators to report failure that results in a design chang e of SPPE equipment to BSEE. Specificall y, if an equipment manufacturer notifies an operator that it has changed the design of the equipment that failed, or if the operator has changed operating or repair procedures as a result of a failure, the operator must submit the design change or modified procedures in writing to BSEE within 30 day s of the change. Because BSEE only expects about 1 operator per ye ar to incur this cost, most small businesses would be unaffected. The BSEE estimates that the average cost would be $168 to a business who reports failure of SPPE equipment as a result of the proposed rule. 23 b. Notifying BSEE about production and technical issues The proposed rule introduces new notification requirements for industry , specificall y notif ying BSEE of occurrences in which: (1) an operator is unable to test valves and sensors; (2) the ability

to monitor casing pressure is affected; (3) a underwater safety valves (USV) 1 fails to operate properl y and an operator designates a USV2 or qualified valve as the USV1; (4) an operator resumes production after an event in which wells were secured; or (5) an operator experiences loss of communication. These requirements are intended to ensure that industry and BSEE remain informed of issues related to e quipment testing, monitoring, and operation. Because BSEE only

expects 10 occurrences of these issues per year, most small businesses would be unaffected b y this provision. The BSEE estimates that the average cost would be $59

23 We assumed that industry staff (mid
- level p etroleum e ngineer) would spend 2 hours to prepare a submittal of design changes or modified procedures. We determined the average hourly wage rate for a p etro leum e ngineer ($58.79) by taking the median wage rate for a petroleum engineer in the United States according to the BLS (http://www.bls.gov/oes/current/oes172171.htm). We then multiplied this rate by a private

- sector loaded wage factor of 1.43 from the BL S to account for employee benefits, resulting in an average hourly compensation rate of $84.07. We then multiplied the number of hours per submittal by the average hourly comp ensation rate to obtain an estimated total annual labor cost of $168.14 (2 x $84. 07 ) to industry for this provision.30

per notification for a business that must notify BSEE of the technical issues as a result of the proposed rule. 24

c. Certification, submission, and maintenance of designs and diagrams The proposed rule requires the inclusion of certification(s) of mechanical and electrical sy stem designs in the production safety s ys tem. It also requires sending a letter to the BSEE District Manager to certify the installation of mechanical and electrical systems would result in increased annual labor. In addition, it requires certifying th e as - built diagrams and submitting the certification letter and diagrams to the District Manager. Finall y, the proposed rule requires maintaining documentation of the piping and instrumentation designs. Because BSEE onl y expects approximately

32 occurren ces per ye ar of the certification, submission, and maintenance process, most small businesses would be unaffected by these provisions. The BSEE estimates that the average cost would be $1,730 per occurrence to a business that must go through the certification, submission, and maintenance process as a result of the proposed rule. 25

24 We assumed that the time required for industry staff (mid
- level p etroleum e ngineer) to notify BSEE of an occurrence in the five categories identified above would be: (1) 0.5 hours; (2) 2 hours; (3) 1 hour; (4) 0.5 hour s; and (5) 0.5 hours. We assumed that, for the five categories, the annual number of notifications would be: (1) 6; (2) 1; (3) 1; (4) 1; and (5) 1. We multiplied the number of staff hours per notification by the average hourly compensation rate for a petro leum engineer (as calculated above) and by the estimated number of notifications per year to obtain an estimated total annual labor cost for each category identified in these provisions. The resulting costs are as follows: (1) 0.5 x $84.07 x 6 = $252.21; ( 2) 2 x $84.07 x 1 = $168.14; (3) 1 x $84.07 x 1 = $84.07; (4) 0.5 x $84.07 x 1 = $42.03; and (5) 0.5 x $84.07 x 1 = $42.03. We then summed these costs to obtain a total annual labor cost to industry of $588.49 ($252.21 + $168.14 + $84.07+ $42.03 + $42.03)
. The average cost, $58.85, is the total cost divided by the number of notifications ($588.49 / 10). 25 We assumed that industry staff (mid
- level p etroleum e ngineer) would spend 12 hours to certify designs of mechanical and electrical systems and include th e certifications in the application. We multiplied the number of hours per certification by the average hourly compensation rate for a petroleum engineer (as calculated above) to obtain an estimated total annual labor cost of $1 ,008.84 (12 x $ 84.07 ) for th e certification part of the provision. Additionally, we assumed that industry staff ( professional engineer, supervisory) would spend 6.5 hours for each certification and submittal of as
- built diagrams . The average hourly wage rate for a professional engineer (supervisory) is $76.00, based on BSEE’s Supporting Statement A (BSEE Production Safety Systems) . We then multiplied this rate by a private sector loaded wage factor of 1.43 from the BLS to account for employee benefits , resulting in a loaded ave rage hourly compensation rate of $108.68. We then multiplied the number of hours per31

d. In spection, testing, and certification of foam firefighting s ys tems This proposed rule requires operators that install foam firefighting s ys tems to inspect the foam concentrates and their storage containers and send samples to the manufacturer or authorized representative for quality condition testing and certification, on an annual basis. It also requires operators to maintain the certification documentation so that it is available for field inspections. The BSEE estimates that the average small business would incur annual costs of $757 related to this inspection, testing, and certification requirement. 26

e. Inspection of fired and exhaust heated components

certification and submittal by the average hourly compensation rate to obtain an estimated total annual labor cost of $ 706.42 (6 .5 x $108.68) additionally for the submissi on part of this provision. Finally, w e assumed that industry staff (field office administrator, clerical) would spend 0.5 hours to maintain each record of as
- built diagrams. The average hourly wage rate for a field office administrator is $21.00, based on BSEE’s Supporting Statement A (BSEE Production Safety Systems). We then multiplied this rate by a private sector loaded wage factor of 1.43 from the BLS index to account for employee benefits, resulting in a loaded average hou rly compensation rate of $30.0 3 . We multiplied the number of hours per record by the average hourly compensati on rate to obtain an estimated total annual labor co st of $15.02 (0.5 x $30.03 ) to industry for this provision. We then summed all parts of the provision to obtain a total aver age cost of $1,730.27 ($1,008.84 + $706.42 + $15.02). 26 We assumed that industry staff (drilling operator, management) would spend 2 hours for the inspection, testing, and certification of each foam firefighting system. The average hourly wage rate used fo r a drilling operator (management) is $64.00, based on BSEE’s Supporting Statement A (BSEE Production Safety Systems). We then multiplied this rate by a private sector loaded wage factor of 1.43 from the BLS index to account for employee benefits , resultin g in an average hourly compensation rate of $91.52. We assumed that there are currently 500 foam firefighting systems installed and that 5 new systems would be installed each year. Multiplying the number of hours per system by the average hourly compensati on rate and by the estimated number of systems per year (2 x $91.52 x 500 in first year) resulted in an estimated total annual labor cost to industry of $91,520.00 in the first year . We repeat ed this calculation for each year of the analysis period using the number of systems expected for the given year . We then average d the results to obtain an estimated average annual labor cost of $95,638.40 for this provision for the entire industry. We then divided this average annual labor cost by the number of opera tors to obtain an average annual labor cost of $735.68 ($95,638.40 / 130) per operator for this provision . We then added to the labor cost the materials cost, assuming a small flat rate shipping box ($5.35) from the United States Postal Service would be us ed by operators
. We then multiplied the per - sample shipping cost by the assumed total number of samples per year to obtain a total materials cost to industry of $2,675.00 (500 in the first year x $5.35). We repeated this calculation for each year of the analysis period using the number of systems expected for the given year and averaged the results to obtain an average annual materials cost of $2,795.38 to the entire industry for this provision. We then divided the average annual materials cost by the num ber of operators to obtain an average annual materials cost of $21.50 ($2,795.38 / 130)
. We then summed the labor cost plus the materials cost to obtain a total average annual cost for this provision of $757.18 per operator.32

This prop osed rule would require certain tube
- ty pe heaters to be removed, inspected, repaired, or replaced every 5 years by

a qualified third party. The requirement to inspect certain fired and exhaust heated components would result in additional inspection costs. There are approximately

1500 fired and exhaust heated components on the OCS that would need to be inspected every

5 years. The cost associated with each component inspection is approximately $5,000. Because every

component would not need to be inspected at the effective date of the rule we averaged the annual number of inspections over the 10 ye ar period, resulting in an average of 300 component inspections per year. This estimate does not take into account any inspections that already are being perform ed b y operators. The BSEE estimates that the average small business would incur annual costs of $11,538 related to this inspection of certain fired and exhaust heated components requirement. 27 f. Submission of contact list for OCS platforms This proposed rule introduces a new requirement for each operator to submit a contact list for all OCS platforms to the BSEE District Manager. Operators also would be required to resubmit the information whenever it is revised. The BSEE estimates that the average small business would incur annual costs of $127 related to this submission requirement. 28

27 Multiplying the number of com ponents for inspection by the cost per inspection (300 x $ 5,000 ) resulted in an estimated total annual labor cost to industry of $ 1,500,000. We repeat ed this calculation for each year of the analysis period using the number of systems expected for the give n year . We then average d the results to obtain an estimated average annual labor cost of $ 1,500,000 for this provision for the entire industry. We then divided this average annual labor cost by the number of operators to obtain an average annual labor cost of $11,538 ($1,500,000 / 130) per operator for this provision
. 28 We assumed that industry staff (field office administrator, clerical) would spend 0.5 hours to submit a new or revised contact list. We assumed that 1,000 new contact lists and 100 revised l ists would be submitted each year. We multiplied the number of hours per list by the average hourly compensation rate for a field office administrator (as calculated above) and by the number of lists per year to obtain an estimated total annual labor cost to industry of $16,516.50 (0.5 x $30.03 x 1,100) . We then divided the total annual labor cost by the number of operators to obtain an average annual labor cost of $127.05 ($16,516.50 / 130) per operator
.33

g. Industry

familiarization with new regulations During the first year that this proposed rule would be in effect, operators and lease holders would need to read and interpret the rule. Through this review, they will familiarize themselves with the new structure of the rule and identify any new provisions relevant to their operations. In the first year of the Proposed Rule, BSEE estimates that the average small business will spend approximately

2 hours of staff time to read and review the new requirements, which amounts to approximately

$217 in a one

- time labor cost for the first year. 29
4
. Total Cost Burden for Small Entities Because most small entities would not be subject to all of the rule provisions, we also calculated the most likely impact on small entities, or the impact associated with only incurring the cost for the provisions described in parts d, e, f, and g above. This calculation resulted in a most likel y average annual cost per affected small entity of $12,444, as shown in Exhibit 6. In addition, we calculated a “worst case scenario” impact for an entity that would incur the costs of all of the rule provisions. As shown in Exhibit 6, this worst case sc enario impact is $1472 per affected entity. We then calculated the impact on small entities for these three scenarios as a percentage of the average revenues for small entities in the affected industries. 30 As shown in Exhibit 7, the

29 We assumed that industry staff (professional engin eer, supervisory) would spend 2 hours to review the new regulation. We then multiplied the number of hours per review by the average hourly compensation rate for a p rofessional engineer (as calculated above) to obtain a total one
- time labor c ost of $217.36 (2 x $108.68) per operator . 30 The Office of Natural Resource Revenue, http://www.onrr.gov/ONRRWebStats/default.aspx , reports the total 2009 small company revenue to be $4,113,000,000. We calculated the average revenue per small business by dividing the total small business revenue by the number of small businesses subject to the rule ($4,113,000,000 / 90) to obtain an average of $45,700,000 per operator.34

average costs of the three scenarios represent far less than 1 percent of average annual revenues for small entities in the affected industries. Based on this analy sis, BSEE believes that this NPRM is expected to have a limited net direct cost impact on small operators, lease holders, and pipeline right
- of
- way holders beyond the baseline costs currently imposed by

the 1988 final rule, DWOPs, NTL s, and API standards with which industry

already complies. The BSEE thus concludes that this proposed rule would not have a significant economic impact on a substantial number of small entities.

**E XHIBIT**  **6: ANNUAL COST PER ENTITY (TEN**  **- YEAR AVERAGE)**  **Ten -** **Year Average** a) Reporting after a failure of SPPE equipment $168 b) Notifying BSEE about technical issues $59 c) Certification, submission, and maintenance of designs and diagrams $1,730 d) Inspection, testing, and certification of foam firefighting systems $757 e) Inspection of fired and exhaust heated components $11,538 f) Submission of contact list for OCS platforms $127 g) Familiarization with new regulation $22 **Most likely average annual cost per small entity (d + e + f + g) $12,444**  **Worst -**  **case scenario average annual cost per small entity 31**  **$14,721**

**E XHIBIT**  **7: COST AS A PERCENTAGE OF REVENUE**  Average revenue of a small business $45,700,000

31 We estimated the worst
- case scenario cost by calculating the total cost for a business that incurs the cost of each provision in the Proposed Rule for a total cost of $ 14,721 ($168.14 + [$42.03 + $168.14 + 84.07 + 42 .03 + 42.03] + $1,730.27 + $757. 18 + $11,538 + $127.05 + $21.70).35 Cost Cost / Revenue Most likely total **(d + e + f + g)** $12,444 0.027% Worst
- case scenario cost total $14,721 0.032%

5. Description of Significant Alternatives to the Proposed Rule The operating risk for small companies to incur safety or environmental accidents is not necessarily

lower than it is for larger companies. Offshore operations are highl y technical and can be hazardous. Adverse consequences in the event of incidents are the same regardless of the operator’s size. The proposed rule aims to reduce risk for entities of all sizes. Nonetheless, BSEE is requesting comment on the costs of these proposed policies on small entities, with the goal of ensuring a thorough consideration and discussion at the final rule stage. We specificall y request comments on the burden estimates discussed above as well as information on regulatory alternatives that would reduce the burden on small entities.